The biotech sector remains one of the most innovative segments of the overall market. Cutting-edge research is being conducted to help treat a wide swath of disease states with the potential for outsize rewards if the novel treatment is proven effective. The boom-bust nature of clinical research has lead to numerous spectacular flameouts, which lessen the appeal of the sector to the more risk-averse investor. We have identified a promising newly-formed company with real earnings, and one that may be poised to accelerate earnings now that a promising new rare-disease molecule has been brought into the fold.
By Alexander J Poulos
Overview of Bioverativ
Biovertaiv (BIVV) is a newly-formed entity that was spun off from Biogen (BIIB) in early 2017. Biogen made the strategic decision to focus on its core franchises, most notably its lead clinical molecule for Alzheimer’s disease. The hemophilia assets primarily Eloctate and Alprolix fell outside of Biogen’s core competency even though the assets continue to grow and generate cash. We applaud the management team of Biogen for having the foresight to reward shareholders by placing the hemophilia franchise and related clinical assets into a new entity and spin the newly-formed company off to shareholders. Bioverativ begins its life as a publically-traded biotech with minimal debt in addition to two commercially-viable products that generated over $700 million in revenue in 2016.
The Building of a Leading Hematology Rare-Drug Company
When evaluating the commercial potential of a particular treatment, we analyze the dynamics of the overall market to help us gauge the potential. We have often found the market to exhibit irrational pricing, often pricing in an optimal scenario well before clinical results are disclosed. We do our best to caution against the “hyped” stocks whose valuations incorporate what we think is a best-case scenario, often including a buyout by big pharma at a premium. We have found by exercising a modicum of patience, the market can at times offer compelling opportunities.
According to Bioverativ, the hemophilia market is a $10 billion dollar global market that is growing at a 7% clip. The market is skewed more heavily towards those patients afflicted with Hemophilia Type A with an expected global population of approximately 151,000 patients. The Hemophilia Type B market is notably smaller with a patient population of around 30,000 patients. The continued growth of the overall hemophilia market coupled with rare drug pricing dynamics bodes well for a continued short-term increase in revenue.
That said, the hemophilia market remains fiercely competitive with new entrants expected to limit the ongoing growth of Bioverativ’s established products. Our bullish thesis on Bioverativ does not rest on continued growth in hemophilia; instead, we fully expect the company to utilize its balance sheet and free cash flow to enter into partnerships or make an outright purchase of a promising molecule. Depending on how the company executes will determine the long-term viability of the enterprise.
True North Acquisition
Bioverativ, in our opinion, has accelerated its transformation with a masterstroke of an acquisition of True North for its lead compound TNT009. TNT009 is a monoclonal antibody that has shown in phase 1b testing to be effective for the treatment of Cold Agglutinin Disease. Cold Agglutinin Disease (CAD) is a chronic, rare hemolytic anemia where the body destroys its healthy red blood cells, which can lead to multiple transfusions over the course of a year. The patient afflicted with CAD often suffers from chronic fatigue due to a reduction in the body’s ability to transport oxygen to the cells, leading to a loss of production and decrease in overall quality of life. CAD is exacerbated by cold temperatures, infection, and stress, which can make treating this patient class very challenging. At present, the marketplace is devoid of treatment for CAD which in our view only heightens the appeal of the acquisition of True North in our opinion.
Based on the strength of the recent phase 1b trial, the FDA has bestowed the coveted breakthrough designation, which will likely speed up the process of bringing the innovation to market. The prevalence of CAD is estimated at 16 per million globally with approximately 5,000 patients in the US. We view the target market as very robust—the most appealing portion from our perspective is the seeming absence of competition in the space. We feel, assuming the product is approved, Bioverativ will have a commanding first-mover advantage in the marketplace. With Bioverativ’s existing sales force well versed in building relationships with hematologists via the sales of Eloctate and Alprolix, the product meshes well and will not result in excessively ramped-up costs for marketing and detailing. We fully expect the sales force will seamlessly shift focus to TNT009 when making sales calls.
From a balance sheet perspective, the True North Acquisition was funded by a combination of cash and debt for $400 million. True North is entitled to an additional $425 million based on the achievement of certain milestones. Bioverativ will own the full commercial rights to TNT009, for what we believe is a value-based price. CAD is classified as a rare disease, which grants Bioverativ an orphan drug tax credit, lowering overall taxes paid over the next few years. We feel the tax credit is an extra bonus, in light of Biovertaiv’s robust current earnings per share.
Rare Drug Pricing Dynamics
The dynamics of the rare-drug marketplace are very compelling in our view. The smaller target market often leads to a lack of competition, unlike what is generally seen in more common disease states such as diabetes. The seeming absence of competition meshed with unmet need may result in a very profitable niche product with high barriers to entry. For example, Alexion Pharmaceuticals (ALXN) has built an enviable business around its Soliris franchise with annual treatment cost well in excess of $300,000 per patient. The larger the patient population, the lower cost per patient treated, and it is not uncommon for a rare drug to exceed $1 billion in sales per year. We feel TNT009 has the potential to exceed the blockbuster drug status of $1 billion in sales per year, assuming the product remains effective in late-stage trials and patients do not develop some unforeseen grade four adverse events.
Conclusion
We like the potential of Bioverativ’s clinical pipeline with the recent addition of TNT009 and feel the risk-reward is very compelling as the company remains profitable thanks to its hemophilia franchise. We suspect the strength of the hemophilia franchise can easily tide the business over until TNT009 is approved. At this point, we expect earnings to dramatically expand as clinicians should be eager to utilize the treatment. As with any biotech entity, however, there is tremendous risk to any investment in shares.
Healthcare and biotech contributor Alexander J. Poulos is long Bioverativ.